It is strangely fitting that consultancy Towers Watson should have spent much of yesterday reminding a room full of institutional investors and fund managers about the importance of risk management and governance.

It was, after all, September 15 – the second anniversary of the collapse of US investment bank Lehman Brothers.

Yet, in an interactive session to determine consensus on the six most important challenges that asset managers need to overcome in the next decade, it was not risk management that came top.

Participants at the firm’s Ideas Exchange Conference in Hong Kong agreed that it was, in fact, striking a balance between long-term strategic asset allocation and the ability to respond dynamically to a rapidly evolving investment environment.

As Towers Watson’s global head of investment, Carl Hess, notes: “Business cycles and economic cycles will be increasingly short. Secondly, imbalances in the global economy remain quite severe, and the potential for prices in the market to get away from fair value look like they are going to be fairly frequent.”

New York-based Hess and his colleagues were at pains to point out the difference between dynamic strategic asset allocation – adjusting allocation in response to significant mispricing in the expectation that a reversion to fair value is likely over one to three years – and tactical asset allocation, which has a far shorter time frame and is about seizing trading opportunities within an inner range of market valuation expectations.

“I think people’s attention to this was introduced when they sat through three years of negative markets in equities,” says Naomi Denning, Hong Kong-based managing director of Towers Watson’s investment services for Asia-Pacific. “With hindsight they were able to say, ‘well it was obvious that equities were overvalued and we should have had a mechanism to do something about that’, but they didn’t.’”

Conference participants ranked risk management and governance as the second most important challenge they continue to face, followed by the prospect of dealing with the potential fallout from the huge increase in developed-market sovereign debt.

Data from the International Monetary Fund and the World Economic Outlook database comparing 2008 and forecasts for 2013 shows a rising trend for both global fiscal deficits and government debt as a percentage of GDP.

This would clearly have implications for economic growth, leaving investors to question where their returns are going to come from.

“When we are talking about the number of debtors that we have, we would be stupid to think that all outcomes are benign,” says Hess. “If you go back to fundamental parts of the economy, you can’t shrink governments’ deficits and shrink businesses’ deficits at the same time. With the de-leveraging that we think has to happen, who is going to buy this? You could argue it should probably not be you.”

He suggests that simple cap-weighted bond investing is prone to difficulties and urges funds to think about defensive measures, including diversification into the corporate bond market.

Another key issue for funds over the next decade is the rising importance of emerging markets within portfolios and the risks associated with a continuing shift in allocation to this asset class.

It is not just fund flows that are increasing towards emerging markets, but the size of the markets themselves as they gain access to global capital and present a wider range of investment opportunities.

Goldman Sachs research finds that emerging-market equity capitalisation could rise from $14 trillion at present to $37 trillion by 2020 and $80 trillion by 2030. The emerging markets weight in the MSCI All-Country World Index may also increase from 13% to 19% by 2020 and 31% by 2030.

Hess notes that his email inbox has increasingly become loaded with invitations to conferences in Brazil.

“Some of these [emerging-market] economies are growing faster than their markets, which can lead to bubbles," he adds. "I don’t think you can ignore the opportunities. I just think you have to make sure you will be keeping the returns.”

Another challenge put forward was making a meaningful allocation to alternative assets without assuming higher complexity and higher costs.

"Where we would like to see continued progress is on fees," says Hess. "Much too much of the excess value is being kept by agents and not being turned over to principals. For alternatives really just to function at the institutional level, that will have to change."

However, Hess did note what he describes as reassuring signs that the investment management community is willing to compromise in terms of striking a better deal. "Better high-water marks and better overall terms are some of the compromises we have seen."